Eq: Total Market

2024 has seen the stock market make 17 closing, all-time highs. Despite this strength, many are noting some reasons to be cautious about equities due to some concerning developments under the surface.

 

In essence, the strong performance of the indexes and mega-cap technology stocks is masking hidden weakness. This is reflected in the Dow Jones Transportation Average failing to confirm the new highs of the Dow Jones Industrial Average which is a ‘non-conformation’ according to Dow Theory. Dow Theory warns that a new high by the Industrials but not by transportation stocks is prone to failure. Similarly, riskier parts of the market like high-yield bonds and high-beta stocks are also underperforming Treasuries and low volatility stocks, respectively. 

 

The leader of this bull market has been technology due to excitement around AI and strong earnings growth from leading tech companies. However, there are signs of exhaustion as the relative ratio of the S&P 500 tech sector has failed to confirm the breakout in the S&P 500. According to David Rosenberg, the founder and President of Rosenberg Research, “These were the most important stocks for the market, and no longer look to be in control.” He believes that the longer these measures fail to confirm the new highs in the S&P 500, the larger the risk of a reversal. 


Finsum: 2024 has been a strong year for the stock market with the S&P 500 making new highs. Yet, there are some signs that the rally may be nearing exhaustion. 

 

Category: Eq: Total Market 

Keywords: #S&P 500; #bull market; #tech; #equities; #risk; 

Last week, the Nasdaq made an all-time high pushing past its previous highs from January 2022. This was before the Federal Reserve embarked on an aggressive campaign of rate hikes to curb inflation. In one respect, the tech-heavy Nasdaq is playing catch-up with the S&P 500 which has been setting new record highs over the last couple of months and is now more than 10% above its January 2022 levels.

 

While a major component of these advances is due to the strength in the 7 largest technology stocks and frenzy around the AI boom, it’s worth noting that the equal-weighted indices for the Nasdaq and S&P 500 also made new, all-time highs as well. It’s an indication that the bull market is expanding in terms of participation. It also leads to the conclusion that the market is strong from a bottom-up perspective as well.

 

Another way to assess the market’s strength from a bottom-up perspective is corporate earnings. With Q4 earnings season nearly in the books, it’s clear that earnings remain robust despite a host of macro headwinds. So far, 97% of S&P 500 companies have reported. 73% topped earnings expectations, while 64% exceeded revenue estimates. Overall, earnings were up 4% compared to last year, marking the second consecutive quarter of earnings growth, validating the bullishness of investors. 


Finsum: The stock market is making all-time highs consistently in 2024. The strength goes beyond the ascendant tech sector as equal-weighted indices are hitting new highs, while corporate earnings continue to grow despite an array of headwinds. 

2023 was an unprecedented year for interest rate volatility. The yield on the 10-year reached a low of 3.3% in April following the regional banking crisis, peaked at 5% in October, and finished the year at 3.8% following a series of supportive inflation data.

Given that inflation has declined to 3.1% which is nearly 70% less than the highest levels of 2021, the odds of a soft landing continue to rise. Currently, the Fed’s plan is to loosen financial conditions by lowering the Fed funds rate, while it continues to shrink its balance sheet.

Part of the plan should also be to reduce bond market volatility especially since it has doubled over the past 2 years and remains elevated relative to norms. In some respects, elevated bond market volatility is a consequence of the Fed’s battle against inflation. Now, it must also effectively deal with this issue before it becomes more substantial. 

Therefore, it’s likely that the Fed will cut back on its quantitative tightening program in which $95 billion worth of maturing bonds are not reinvested. Already, these efforts have succeeded in shrinking the Fed’s balance sheet by 15%. Another reason that curbing bond market volatility is necessary is that the Treasury will be auctioning off large amounts of notes and bills in the coming months. 


Finsum: The Federal Reserve has made significant strides in turning inflation lower. Now, it must take steps to reduce bond market volatility.

 

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